A Targeted Dividend ETF Strategy for Fed Rate Rise

If the Federal Reserve decides to hike rates, yield-hungry investors can turn to a dividend-themed exchange traded fund that can help leverage a rate increase by targeting companies with low correlation to interest rates.

Specifically, the Fidelity Dividend ETF for Rising Rates (NYSEArca: FDRR) is a type of dividend strategy for investors anticipating rising rates. The ETF also shows a respectable 2.95% 30-day SEC yield.

FDRR is designed to reflect the performance of stocks of large and mid-capitalization, dividend-paying companies expected to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields.

“Positive correlation to Treasury yields and sector neutrality may help protect investors’ returns in rising rate environments, when high-yielding stocks and sectors tend to underperform,” according to a Fidelity Investments note.

Looking at FDRR’s portfolio construction methodology, the underlying Fidelity Dividend Index for Rising Rates employs a multi-factor approach, including a 63% weight toward companies with higher dividend yields, and smaller 13.5% to avoid firms with payouts that are too high and might be cut in the future, 13.5% to those expected to grow dividends in the future and 10% to firms that perform better with rising rates.

The dividend ETF may be a timely play as Donald Trump’s presidential election victory and his inflationary economic policies could prompt the Federal Reserve to begin hiking interest rates – Trump has promised to stimulate faster economic growth with measures like a large tax cut and as much as $1 trillion in infrastructure spending.